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Taxability of Gifts:

Generally, gifts received are not regarded as Income chargeable to Tax.


However, by virtue of section 2(24)(xiii) r.w.s. 56(2)(v) after 1-9-2004, any sum
of money exceeding Rs. 25,000 (Rs. 50,000 in respect of gifts received in or
after 1.4.2006), received without consideration by an individual or an HUF
from any person is chargeable to tax as Income under the head Other
Sources, subject to certain exceptions:

Exceptions being:

[(a) Receipts from certain relatives; as defined in the section]. (Refer Chart)

[(b) Receipts on occasion of marriage of the individual.]

[(c) Receipts under a will or inheritance.]

[(d) Receipts in contemplation of death of the payer.]

Sec. 56(2)(v) has been amended by the Taxation Laws (Amendment) Act, 2006
so as to exempt also the receipts from:

(i) local authority,


(ii) institutions exempt u/s. 10(23C); and
(iii) trusts/institutions registered u/s. 12AA.

Sec. 56(2) has been further amended and w.e.f. 1-10-2009, the scope of gift
is increased by adding immovable property or any property besides sum of
money [S. 56(2)(vii)] but excluding stock-in-trade, raw material, consumable
stores or any other trading assets as under :

List of Property –

i) immovable property being land or building or both ;

ii) shares and securities ;

iii) jewellery ;

iv) archaeological collections ;

v) drawings ;

vi) paintings ;

vii) sculptures ;

viii) any work of art ;


Valuation of Gift in case of:

(i) Immovable Property

(a) without consideration – if stamp duty value exceeds Rs. 50,000/-, stamp duty
value

(b) for a consideration which is less than stamp duty value – Provision not
applicable

(ii) Any other property:

(a) without consideration – fair market value exceeds Rs. 50,000/-, fair market
value of the property

(b) for a consideration – fair market value less consideration exceeds Rs.
50,000/-, the fair value less consideration.

w.e.f 1-6-2010 following items added:-

1. Bullion

2. Receipt of shares of a closely-held company without consideration or


inadequate consideration is taxable. S. 50(2) (viia)

A. Provision not applicable in case of the following restructuring:

i. Transfer of shares of Indian company by amalgamating foreign company


to amalgamated foreign company
ii. Transfer of shares of Indian company by de-merged foreign company to
resulting foreign company
iii. Transfer by shareholder of co-operative bank in a business
reorganization of a co-operative bank.
iv. Transfer by shareholder of shares of amalgamating company

B. Receipt of shares of a closely-held company by a firm (including LLP) or a


closely- held company taxable if transfer is without consideration or for
inadequate consideration.

C. Fair market value less consideration is taxable, subject to difference of more


than Rs.50,000.

D. Amount taxed to be treated as cost of acquisition in the hands of recipient.


Relatives from whom Gift is permissible

List of Male Donors List of Female Donors


Father (Papa or Pitaji) Mother (Maa or Mummy)
Brother (Bhai) Sister (Bahin)
Son (Beta or Putra) Daughter (Beti or Putri)
Grand Son (Pota or Potra) Grand Daughter (Poti or Potri)
Husband (Pati) Wife (Patni)
Sister’s Husband (Jija) Brother’s Wife (Bhabhi)
Wife’s Brother (Sala) Wife’s Sister (Sali)
Husband’s Brother (Dewar) Husband’s Sister (Nanad)
Mother’s Brother (Mama) Mother’s Sister (Mausi)
Mother’s Sister Husband (Mausa) Wife’s brother’s wife (Sala Heli)
Father’s Brother (Chaha or Tau) Father’s Brother’s Wife (Chachi or
Tai)
Father’s Sister’s Husband(Fufa) Father’s Sister (Bua)
Grand Father (Dada) Grand Mother (Dadi)
Great Grand Father (Pardada) Great Grand Mother (Pardadi)
Daughter’s Husband (Jawai) Son’s Wife (Bahu or Putra Vadhu)
Wife’s Father (Sasur) Wife’s Mother (Sas)
Husband’s Father (Sasur) Husband’s Mother (Sas)
Wife’s Grand Father (Dada Sasur) Husband’s Grand Mother (DadiSas)
Husband’s Grand Father (Dada Sasur) Wife’s Grand Mother (Dadi Sas)
Wife’s Great Grand Father(Bada Dada Husband’s Great Grand Mother
Sasur) (Badi Dadi Sas)
Husband’s Great Grand Father(Bada Wife’s Great Grand Mother (Badi
Dada Sasur) Dadi Sas)
Brother’s Wife(Bhabhi) Mother’s Brother’s Wife (Mami)
Husband’s Brother’s Wife(Devrani or
Jithani)

Notes:

1. Subject to clubbing provisions applicable for Gift received from Spouse


and Parent-in-Law.
2. The individual can receive gifts without attracting tax also from lineal
ascendents and decendents of the individual/spouse of the individual
other than those mentioned in the above chart.
Valuation rules for determining ‘fair market value of gifts’

Background:

The Finance (No. 2) Act, 2009 has inserted clause (vii) in section 56(2) of the
Income-tax Act (‘the Act’) to tax an Individual or a Hindu Undivided Family (HUF)
who is receiving any asset which is in the nature of shares and securities,
jewellery, archaeological collections, drawings, paintings, sculptures or any work
of art (specified assets) without consideration or for inadequate consideration i.e.
consideration which is less than fair market value (FMV) by an amount exceeding
Rs. 50,000. Further, the Finance Bill, 2010 proposes to insert a similar provision
to tax receipt of shares of a closely-held company by a firm or another closely
held company. If Bill is enacted and become part of the law, then, the rules
notified will also apply to the valuation of shares covered by the proposed
provisions.

Synopsis of the Rules

The rules 11U and 11UA prescribes the different methods for the purpose of
valuation of specified assets.

The FMV of the specified asset needs to be determined on a date on which such
specified assets are received by the assessee.

The determination of FMV, under this rule, will be only for the purpose of section
56 of the Act.

Notification No. 23/ 2010, which shall come into force from 1st October, 2009.
Further, specified assets received from relative are not covered by the provisions
of Section 56(2)(vii) of the Act.

Methods of Valuation

1. Valuation of Specified assets (other than shares & securities)

Description of the property Basis for determination of FMV


Specified assets other than shares Estimated price which specified
and securities asset will fetch if sold in the open
market on the valuation date.
In case if specified assets are FMV is the Invoice Value of the
received by the way of purchase on asset.
the valuation date from the
Registered Dealer (means a dealer
who is registered under Central
Sales-tax Act, 1956 or General
Sales-tax Law for time being in force
in any state including value added tax
laws).
In case if specified assets are The assessee may obtain the
received by any other mode and the report of registered valuer in
value of the specified assets exceeds respect of the price it would fetch
Rs. 50,000. if sold in the open market on the
valuation date.

A registered valuer is a person


who is entitled to function as
registered valuer for the purpose
of the Wealth Tax Act.

2. Valuation of Shares & Securities

 Valuation of Quoted Shares & Securities

Description of the property Basis for determination of FMV


If quoted shares and securities are Transaction value recorded in
received by way of transaction such RSE.
carried out through any Recognized
Stock Exchange (RSE)
If quoted shares and securities are Lowest price quoted on any RSE
received by way of transaction on the valuation date.
carried out other than through any
RSE. If in case there is no trading on the
valuation date, then, FMV will be
lowest price on the date
immediately preceding the
valuation date when trading
happened.

 Valuation of Un-quoted Shares

Description of the property Basis for determination of FMV


Unquoted Equity Shares Value as per the balance sheet
(including notes
thereto) on the valuation date in terms
of the following
formula:

(A – L) x PV
—————
PE

Where,
A = Book value of assets in balance
sheet
less
advance income-tax paid, any amount
which does
not represent the value of any asset,
including debit
balance in profit & loss account

L = Book value of liabilities in balance


sheet less
(i) paid-up equity capital;
(ii) amount set aside for undeclared
dividend;
(iii) reserves, other than towards
depreciation;
(iv) credit balance in profit & loss
account;
(v) amount of provision for tax, other
than advance
income-tax paid in excess of tax
payable with reference to book profits
(minimum alternate tax);
(vi) provision towards unascertained
liabilities;
(vii) provision towards contingent
liabilities.

PE = Total amount of paid-up equity


share capital

PV = Paid-up value of such equity


shares received

 Valuation of Unquoted Shares other than equity shares

Description of the property Basis for determination of FMV


Unquoted shares and securities other Price it would fetch if sold in open
than equity shares in a company which market on the valuation date & the
are not listed in any RSE assessee is required.

To obtain a report from a Merchant


Banker or a Chartered Accountants
in support of the FMV